The Funding: Crypto VCs unpack the largest liquidation event in history — and what’s next

The Oct. 10 crypto crash — which wiped out over $20 billion (and potentially much more) in leveraged positions within hours — was the biggest liquidation event in the industry’s history. The speed and scale of the selloff stunned traders and exposed how fragile crypto’s market structure remains. I asked crypto VCs what triggered the cascade, what fixes are needed to prevent a repeat, and what comes next.

Most investors said the crash was less about Trump or tariff headlines and more about leverage and weak infrastructure. Open interest — a proxy for notional leverage — had reached record highs, meaning there was simply “more money that could be liquidated,” said Rob Hadick, general partner at Dragonfly. When prices started to slip, liquidity on exchanges like Binance — the market’s main pricing hub — evaporated, triggering forced liquidations across venues that referenced its prices. “It highlights a broad fragility in market structure and a need to continue to professionalize our systems as an industry,” Hadick said.

Losses rippled across the system, hitting traders, market makers, and centralized exchanges alike. The heaviest damage likely fell on high-leverage traders and funds running basis or other neutral strategies that were forcibly unwound, VCs said. Still, the full impact will take time to surface. Joscha Kuplewatzky, investment manager at Wintermute Ventures, noted that hidden losses often emerge weeks later — though this time, he and others expect less systemic contagion than past collapses like FTX or Terra/Luna. Anirudh Pai, partner at Robot Ventures, agreed the liquidation event was more technical than existential, arguing that improving macro conditions — from easing inflation to stronger growth signals — could present a “goldilocks moment” for crypto to outperform over the next few years.

Decentralized finance platforms, meanwhile, held up remarkably well, according to most VCs I talked to. Protocols like Aave, Morpho, and Ethena stayed stable and transparent through the chaos — a sign of how much DeFi has matured even as CeFi faltered, said Mathijs van Esch, general partner at Maven 11.

What structural fixes are needed

Most investors agreed that the crash exposed deep flaws in how crypto markets handle leverage and risk. The first fix, they said, is simple: use less leverage. Beyond that, the focus should be on stronger oracles, smarter liquidation systems, and greater transparency.

Exchanges need price oracles that draw from multiple venues rather than their own order books, VCs said. “If Binance’s liquidation engine had referenced multiple other venues, instead of just its own order book, many of the initial collateral liquidations would not have happened,” said Hadick. He added that features like direct mint/redeem with Ethena’s USDe could have replenished order books faster and prevented the forced selling that sent the stablecoin’s price below $0.66 on Binance.

Ray Hindi, co-founder and managing partner of L1D AG, and Pai of Robot Ventures called for exchanges to overhaul opaque auto-deleveraging systems. Framework Ventures’ partner Brandon Potts added that “smarter liquidation engines that unwind positions gradually” and liquidity buffers that adjust to volatility and depth could prevent similar spirals. But the biggest issue, van Esch said, remains opacity: “This event showed how hidden risk and leverage can build up. More transparency is the best way to fix that fragility.”

On regulation, most investors favor self-regulation over stricter oversight. While some expect renewed scrutiny, few see investigations as the answer. Pai said only another FTX-level crisis would trigger a broad investigation into crypto markets. Hindi added that the community should “force CeFi to auto-regulate” by shifting assets to transparent DeFi systems. Van Esch said real-time, provable audits of CeFi exchange reserves “would do more to solve the core problem of hidden risk than any regulation probably could.”

What’s next for bitcoin and the market

Most VCs expect a cautious recovery as liquidity rebuilds. A lot of investors and traders lost money — they’ll need time to re-enter the market in the same size and take on more risk, said Hadick.

Bitcoin and ether’s resilience was seen as proof of a maturing market. Investors said both assets held up because they’re owned by long-term institutions, not high-leverage traders. Altcoins, by contrast, took the deepest hit. Maven 11’s van Esch said market makers will need time to return, especially in smaller tokens, while Potts of Framework Ventures noted that the strength of bitcoin and ether signals genuine spot demand rather than speculative leverage.

Hindi warned that macro in the form of credit risk is the real shock that could impact bitcoin negatively. “The DAT [digital asset treasury] bid is gone and nowhere to be seen,” he said. “Unforeseen balance sheet shifts as a result of the recent liquidation in the absence of very active market makers could ignite more volatility in crypto overall. It will likely present a buying opportunity.”

For most VCs, the crash was a reminder, not a reset. Hadick said it reinforced the need to stay long-term focused on what’s durable rather than react to short-term volatility.

Hindi said the event showed why CeFi can’t be trusted at scale and plans to move “more aggressively into DeFi” after watching decentralized systems hold up as centralized ones struggled.

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